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The effectiveness of capital controls

Author

Listed:
  • Valerio Nispi Landi

    (Bank of Italy)

  • Alessandro Schiavone

    (Bank of Italy)

Abstract

The goal of this work is a systematic analysis of the effectiveness of capital controls in reducing the volume of capital flows and the probability of extreme events (surges and flights), strengthening financial stability and affecting the exchange rate. We find that controls significantly reduce capital flows, even though the effectiveness varies across economies and types of investment. Moreover capital controls tend to reduce the probability of extreme episodes. With regard to financial stability objectives, controls on banking inflows reduce domestic credit growth, but this effect is mainly driven by advanced economies. Controls on capital inflows reduce the share of domestic loans denominated in foreign currency. Finally, our estimates suggest that capital controls on inflows tend to be associated with an undervalued exchange rate only in emerging market economies.

Suggested Citation

  • Valerio Nispi Landi & Alessandro Schiavone, 2018. "The effectiveness of capital controls," Temi di discussione (Economic working papers) 1200, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1200_18
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    Cited by:

    1. Chen, Gao, 2024. "Capital controls and capital flows: Do controls reduce the size of flows?," Journal of International Money and Finance, Elsevier, vol. 145(C).
    2. Alessandro Moro, 2021. "Can capital controls promote green investments in developing countries?," Temi di discussione (Economic working papers) 1348, Bank of Italy, Economic Research and International Relations Area.
    3. Jean-Charles Bricongne & Antoine Cosson & Albane Garnier-Sauveplane & Rémy Lecat & Irena Peresa & Yuliya Vanzhulova, 2021. "Financial flows, macro-prudential policies, capital restrictions and institutions: what do gravity equations tell us?," Working papers 842, Banque de France.
    4. Fernando Eguren Martin & Mark Joy & Claudia Maurini & Alessandro Moro & Valerio Nispi Landi & Alessandro Schiavone & Carlos van Hombeeck, 2020. "Capital flows during the pandemic: lessons for a more resilient international financial architecture," Questioni di Economia e Finanza (Occasional Papers) 589, Bank of Italy, Economic Research and International Relations Area.
    5. Zhou, Yang, 2024. "Benefits and costs: The impact of capital control on growth-at-risk in China," International Review of Financial Analysis, Elsevier, vol. 93(C).
    6. Kitano, Shigeto & Zhou, Yang, 2022. "Effects of China’s capital controls on individual asset categories," Finance Research Letters, Elsevier, vol. 49(C).
    7. Lorenzo Esposito & Giuseppe Mastromatteo, 2019. "Defaultnomics: Making Sense of the Barro-Ricardo Equivalence in a Financialized World," Economics Working Paper Archive wp_933, Levy Economics Institute.
    8. Apoorv Bhargava & Romain Bouis & Annamaria Kokenyne & Manuel Perez-Archila & Umang Rawat & Ms. Ratna Sahay, 2023. "Do Capital Controls Limit Inflow Surges?," IMF Working Papers 2023/050, International Monetary Fund.

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    More about this item

    Keywords

    international capital flows; capital controls; prudential tools;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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